Disney's Dividend Growth Potential

| About: The Walt (DIS)

When most people think of The Walt Disney Company (NYSE:DIS), it brings a smile to their face. Perhaps it rekindles their childhood memories or the memories of taking their young ones to visit Mickey, Minnie, Donald, and Daisy. In a nutshell, Disney makes people happy.

Entertainment and money? Perhaps the best combination that most of us can think of. Disney is also getting into the regular habit of making its investors happy and has just announced an increase to its annual dividend. Let us look into the details of this announcement and evaluate how Disney stacks up as a potential long-term dividend growth stock.

Disney's Dividend Basics:

  • The company has been paying dividends since 1962 according to Finance.Yahoo.Com
  • The dividends have been increasing almost every year since the initiation, with the most recent dividend freeze happening in 2008 and 2009 (no wonder!)
  • The company has been paying annual dividends instead of quarterly since 1999.

New Dividend and Yield: The new annual dividend of 86 cents per share gives Disney an annual yield of 1.3%. But please read further before you write off Disney as a potential income stock.

Payout Ratio: Disney's payout ratio stands at a lowly 25%, which gives a lot of room for future dividend increases. This is typical of companies that still are aggressive in pursuing growth but also want to reward shareholders at the same time.

Dividend Growth: Disney committed what dividend growth investors consider a cardinal sin. The dividend was not increased in 2008 and 2009. In hindsight, the fact that Disney did not reduce or eliminate the dividend altogether suggests the management was still loyal to investors.

However, since 2010, the dividends have started growing again. And at a rapid pace at that. The table below shows the last 4 dividend increases. Disney is just one more increase away from the 5 year dividend growth streak that a lot of investors look for. Given the low payout ratio and an expected 5 year (average) earnings growth of 15%, investors can certainly look forward to one more meaningful dividend increase next year.

Cash on Hand: Disney's average cash and short-term [ST] investments on hand has averaged $3.4 billion. The current cash and ST investments stand at close to $4 billion, which is almost 25% greater than what it had during the 2009 crisis. Disney does carry more debt than the cash on hand but that is the norm with most companies given the (still) low interest environment. We might see these companies adjusting their game if the rates indeed rocket.

(Source: YCharts.Com)

Extrapolation And Future Returns: Once bitten, twice shy. A company that did not increase its annual dividend when expected might not get the same attention from income investors as it once did. However, most overlook the fact that Disney (and quite a few good stocks) bounced back from its 2008/2009 lows of about $16 to close 2009 at the $30 range. And the dividends started racing up promptly in a few months after that in 2010.

The point is, it is a well known fact that entertainment companies like Disney are very much dependent on people's discretionary income. However, once the market and the economy in general recover, strong companies like Disney roar back more often than not. Hence, the table below assumes an annual average dividend growth of 10% for the first 5 years and 7% for the next 5 years. This conservative number takes into account both possibilities: a) that the dividend might again be frozen if the economy tanks and b) that the company will recover with the economy and start returning the favor to shareholders.

The yield on cost more than doubles for the patient investor. Before you brush that off as too low, please remember this company is still expected to grow its earnings at 15% for the next 5 years.

Earnings Growth and Future Projections: Disney is expected to grow earnings at 15% per year over the next 5 years. If that indeed holds true, the earnings per share will balloon close to $6.80, indicating share price upside as well as dividend upside.

For instance, even if the company maintains the current 25% payout ratio, the dividend could still double to $1.72. We believe the following factors could be the growth catalysts:

  • Content: With so many powerful companies like Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), and Amazon (NASDAQ:AMZN) fighting for digital content for their smart devices, the upside is huge for Disney.
  • CEO: Bob Iger is one of the most respected CEOs out there. His tenure has been extended till 2016 and that by itself is a huge positive for the company.
  • International: While Disney is already a global brand, it is aggressively proceeding with more investments in India and China.

(Source: Finance.Yahoo.Com)

Conclusion: Again, it is no secret that Disney's returns are expected to rise and fall with the general economy. However, this company/stock has got quite a few things going in its favor:

  • International presence
  • A powerful brand
  • A shareholder friendly management (so much that Apple investors predicted that Disney CEO Bob Iger will be the catalyst behind Apple's dividend announcement in 2012)
  • A reasonable dividend that grows at a good frequency, if not every single year
  • Above average earnings growth

That said, the stock has advanced about 40% YTD, going up from $50 to $70. With the market showing some weakness over the past few trading days, a pullback might be in order. Disney is one of the stocks that we believe should be in your watchlist if you are looking for stocks that offer dividend, growth and dividend growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.